Didi, the Chinese Uber, gets listed in the US and faces headwinds at home
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by Gun Woo, Senior Analyst, JK Capital Management Ltd., a La Française group-member company
Didi, often dubbed the Chinese Uber, listed last week in the US. Didi is a ride-hailing app, which works exactly as Uber does. Established in 2012, the company was backed by Tencent and merged with its main competitor Kuaidi, backed by Alibaba, in 2015. In 2016, Apple became a shareholder of Didi, and, the same year, in a surprise move after years of fierce competition, Didi acquired Uber’s operations in China in a share swap transaction. Didi then became the dominant player in China while Uber received a stake in the company (12% currently).
The valuation of Didi at IPO was around USD 68bn, representing a discount to Uber’s USD 100bn market cap. The companies are still very comparable in size with Gross Transaction Values (GTV) for ride-hailing services of roughly USD 27bn in 2020 for both although Didi has a stronger revenue and profit profile. Didi’s net loss was USD 1.3bn in 2020, whereas Uber booked USD 4.8bn of net losses.
So, why was Didi priced at a discount to Uber? We see two elements that can explain it. First is the regional diversification element. Within Uber’s revenue only 60% is generated in the US while 98% of Didi’s revenue is generated in China. Uber is the leader by market share not only in the US, but also in Europe, Latin America, Australia, and India while overseas expansion has so far been limited for Didi.
The second element is business diversification. Uber has successfully diversified in food delivery services “Uber Eats”. In 2020, 35% of Uber’s revenue was generated by the delivery business. Although the GTV from ride-hailing of both companies are at similar levels, the total GTV of Uber is about USD 58bn while Didi’s is only USD 31bn. The food delivery opportunity in China is already dominated by Meituan and Alibaba’s Ele.me, leaving limited space for Didi to expand in that space. Didi is now rather pursuing the grocery delivery market instead.
The listing of the Chinese ride-hailing company started well until, just two days after the IPO, news came out that Didi was under scrutiny from the Chinese government with regards to its data collection and security practices. Two days later the Cyberspace Administration of China (CAC) announced that Didi had committed serious violations in the collection and usage of personal information and ordered the app to be pulled from Chinese app stores until it is remedied (which means Didi cannot add more users or drivers, existing ones however can still use the app). No details were shared as to what precisely the investigation centres on, when or where the alleged violations occurred or whether there will be more penalties to come. This led to some share price weakness which will likely carry on in the near future. Many commentators were quick to theorise that this was all too conveniently scheduled, and that the Chinese administration deliberately waited for the listing to make an example of Didi for other companies to refrain their desires for a US listing. But it has since come out that warnings of the administration to Didi had already been published in May and people close to the matter revealed the Chinese cybersecurity watchdog suggested the Chinese ride-hailing giant delay its initial public offering and urged it to conduct a thorough self-examination of its network security. It appears that Didi chose to ignore the warning, perhaps under pressure from its shareholders to get the listing done.
This is an unfortunate hiccup, and we believe Didi will likely make the necessary amendments soon and resume full operations. What we think is more interesting in the long term is the question of who will take the leadership in the autonomous driving market? It is clear that this is the market both Didi and Uber want to get. With no drivers involved the GTV could easily translate fully into revenue (currently only 20% translates into revenue). More cars could provide Didi service during the idle time, there would be no bottleneck of ride supply. At this nascent stage, it is still unclear who, of the manufacturers or of the ride-hailing companies, will take the lead. Didi, Uber, Geely, Tesla, Baidu, Huawei, Google, Apple and many others are in the starting blocks. Whoever succeeds will likely determine the future of the ride hailing companies such as Didi.
Sources: Didi SEC filings, Uber SEC filings
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